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Michael Saylor’s firm Technique, previously referred to as MicroStrategy, doesn’t simply consider in bitcoin — it has staked its total future on it. Since pivoting from enterprise software program to crypto again in August 2020, it has transformed right into a bitcoin funding automobile, with its shares surging greater than 25-fold. However beneath the euphoria lies a capital construction that’s turning into more and more self-referential.
Technique’s strategy to financing has had three key components. First, it has issued ever bigger quantities of widespread inventory to boost cash for getting bitcoin, making the most of its shares trading at roughly twice the company’s net asset value (NAV).
Second, it has issued large sums of convertible bonds, exploiting the high volatility of its personal shares to safe phenomenally beneficial phrases. Initially these convertibles had been secured towards its bitcoin holdings, however immediately the excellent bonds are unsecured, eradicating the danger of margin calls. If the share worth fails to rise sufficient for the bonds to transform, the corporate nonetheless has to repay the money, however maturities have been pushed out, giving Technique respiration room (at least until the first investor put in September 2027) even when bitcoin costs drop sharply.
Third, it has issued three lessons of perpetual most well-liked shares — Strike (STRK), Strife (STRF) and Stride (STRD) — with excessive, discretionary dividends, a few of which could be paid in form.
The logic was easy: raise as much money as possible to purchase bitcoin. Technique is now by far the largest corporate holder of bitcoin wherever. But its newest transfer might mark a shift.
Earlier this week, Technique announced a $4.2bn at-the-market providing of Stride. On the floor, it seems like one more bid to boost money for extra bitcoin purchases. However tucked away within the announcement was a telling clause: proceeds can also be used to pay dividends on different lessons of most well-liked shares, particularly Strife and Strike (Alphaville emphasis added):
Technique intends to make use of the web proceeds from the ATM Program for basic company functions, together with the acquisition of bitcoin and for working capital, and can also use the web proceeds for the cost of dividends to holders of its 10.00% Collection A Perpetual Strife Most popular Inventory, $0.001 par worth per share and eight.00% Collection A Perpetual Strike Most popular Inventory, $0.001 par worth per share.
This isn’t a refinancing, the place an organization swaps costly capital for cheaper funding. Neither is it a typical dividend recapitalisation, the place an organization borrows to pay shareholders dividends. A dividend recap often assumes the enterprise generates sufficient money to help extra debt. Technique’s legacy software program division doesn’t produce sufficient free money circulation to cowl these most well-liked dividends, and bitcoin, in fact, pays no earnings.
As a substitute, this manoeuvre is one thing totally different. Technique is successfully reserving the suitable to make use of cash from new securities to prop up outdated ones, reassuring buyers that it may possibly hold issuing contemporary paper to cowl dividend funds. This in flip is supposed to offer them confidence to purchase the long run rounds of most well-liked shares.
The entire construction rests on two pillars. First, Technique’s market capitalisation persistently trades above the value of its bitcoin holdings — a uncommon prevalence in what’s speculated to be an environment friendly market. The very best rationalization for the NAV premium is that Saylor instructions a loyal following and his bitcoin technique has a strong narrative momentum. Second, Technique should preserve perpetual entry to capital markets. It must hold discovering new patrons for its paper, whether or not widespread inventory, convertible bonds, or most well-liked shares.
Dependence on these two elements carries apparent dangers. The corporate has no hedge, no diversified earnings, and no plan B. Its destiny hinges on the belief that capital will at all times be out there and bitcoin’s worth will both rise or, on the very least, keep elevated. A protracted downturn or shut-off from funding might drive the unthinkable: promoting bitcoin to satisfy dividend funds. This could signify an existential disaster for a “purchase and HODL” maximalist.
For now, the music performs on. Bitcoin’s rally boosts each Technique’s NAV and the inventory’s premium to NAV, and buyers proceed to clamour for Saylor’s paper. However every new layer of economic engineering makes the construction shakier. Technique has confirmed its strategy pays off in a bull market. The query is whether or not it may possibly stand up to the storm when the tide inevitably turns.
